European banks: rising to the climate challenge with green bonds


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GAM Investments’ Stephanie Maier and Atlanticomnium’s Romain Miginiac detail how European banks are rising to the climate challenge via the green bond market, one of the most important mechanisms for redirecting institutional capital into the green economy.

08 October 2021

Despite their central role in the global financial crisis 13 years ago, banks remain at the heart of the global economy. In Europe, banks finance more than 90% of the continent’s small and medium-sized enterprises (SMEs) and approximately 80% of European corporates. That means they also have a central, but much more positive, role to play in today’s biggest crisis: the climate challenge. It is not just their direct financing activities – in the energy sector alone the top 35 banks provided close to USD 3 trillion of funding in three years to 2019 – banks also have a critical multiplier effect on the rest of economy through their engagement with existing clients. Engagement between bankers and clients tends to be longstanding and forward looking; if they can import climate risk into these discussions and use environmental criteria to influence underwriting decisions and loan pricing, then they can help drive the economy towards net zero by 2050.

Green bond market suggests banks are grasping the green nettle

Importantly, we are starting to see European banks rise to the climate challenge in the green bond market, one of the most important mechanisms for redirecting institutional capital into the green economy. Global green bond issuance continues to grow, having exceeded the USD 1 trillion mark on a cumulative basis with close to USD 300 billion in 2020 alone. In Europe, banks have been one of the most active players in this growth, driven by a record USD 33 billion of investment in the first half of 2021 alone.1 Banks have been issuing green bonds at a faster pace than European corporates, with banks’ green bonds accounting for 35% of the market, compared to non-green bonds accounting for 28% of the market.2

This is part of a wider deployment of ‘net zero by 2050’ strategies by mainstream banks as demonstrated by the Net Zero Banking Alliance, a UN-backed initiative committing global banks with over USD 30 trillion in assets to align with keeping global warming to well below 2 degrees Celsius, and so catalysing a pipeline of green assets such as green bonds. We estimate that the green bond market for European banks can easily reach EUR 200 billion or more in the next 24-36 months (compared to circa EUR 80 billion currently), given the current pace of issuance.

Chart 1: Accelerating issuance of green bonds by European banks (USD billion – cumulative)

Source: Bloomberg, Atlanticomnium, data as of 30 June 2021.

Regulation is the catalyst to ramp up green financing

Banking-related regulation is locking in this trend. Since the 2007 / 08 global financial crisis, regulators’ positive track records in transforming the banking sector have been impressive, and with climate risk at the forefront of the regulatory agenda, the trend for the next decade is clear and includes measures to improve disclosure and introduce stress testing. Climate stress tests are perhaps the biggest game changer as they will in time influence banks’ capital planning, most likely through either capital surcharges for ‘brown’ financing or capital add-ons for inadequate climate risk management. This is already incentivising banks to ramp up their green asset financing. For example, Banco Santander is looking to raise and facilitate EUR 220 billion of green financing over the next decade.

But we cannot rely solely on the banks

While the banks have a primary role in greening the economy, other finance players also have an important part to play. It is vital that investors in green bonds engage to ensure high standards and avoid those without a genuine sustainability purpose. This requires in-depth analysis at the issuer, bond and project level. We have clear criteria to determine which issuers and bonds are eligible for investment. At the issuer level, we conduct in-depth analysis of issuers’ ESG credentials. This is done using a proprietary scoring model, where laggards are excluded. A credible climate strategy with a net zero commitment is a key part of this analysis. At the bond level, we seek green bonds with strong governance and processes. The analysis is done using a proprietary model, based on the International Capital Market Association (ICMA) Green Bond Principles, enhanced by additional internal requirements. Specifically, we seek granular reporting from issuers, subject to third party verification. At the project level (use of proceeds), we assess whether there is meaningful positive environmental impact, using third-party quantitative data as well as our own analysis.

Given the urgency with which we must tackle climate change, green bonds from European banks have become a powerful instrument for investors to generate meaningful positive environmental impact. But it is important that investors in these bonds are active owners who ensure that this time around the banks drive positive change in a crisis.

This article was first published in Investment Week on 21 September 2021.

1 Bloomberg, Atlanticomnium as of 30 June 2021.
2 Barclays Bloomberg Euro-Aggregate Corporate Index, as of 30.06.2021.

Important legal information
The information in this document is given for information purposes only and does not qualify as investment advice. Opinions and assessments contained in this document may change and reflect the point of view of GAM in the current economic environment. No liability shall be accepted for the accuracy and completeness of the information. Past performance is not an indicator for the current or future development.

Stephanie Maier

Global Head of Sustainable and Impact Investment

Romain Miginiac

Fund Manager & Head of Research at Atlanticomnium S.A.

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